New Rules For Mortgages By 2014

29th October 2012

Last week the Financial Services Authority (FSA) outlined a new set of rules that will be applied to mortgage lending from April 2014. Their intention is to prevent a return to the types of risky lending that took place prior to the recession and banking crisis.

It would appear that these rules may be very relevant to homeowners that have signed trust deeds and to also to tenants in the same circumstances who hope to purchase a home in the future.

There has been a suspicion amongst many that mortgage lenders have been taking advantage of borrowers that have become “mortgage prisoners”. A recent thread on our forum is a case in point. The FSA believes that nearly half of those that have taken out mortgages since 2005 are currently unable to re-mortgage using another lender.

About 50% of these mortgage prisoners are in such a position because of credit problems. This will include persons that have entered protected trust deeds in Scotland or other comparable processes. Other mortgage prisoners are currently using interest-only or low loan-to-value mortgage products that are no longer available. Again, many people that are in trust deeds have this type of mortgage.

With immediate effect, the FSA have introduced a new rule that lenders cannot take unfair advantage of an existing client (who is unable to take their mortgage business elsewhere) by treating them unfavourably in comparison to other similar customers.

In addition, the FSA are to allow lenders to ignore some of the restrictions that will apply to new mortgages when reviewing the mortgages of long-standing borrowers. So long as the borrowers isn’t trying to raise additional capital, and their repayment record is good, they may retain access to interest-only or low loan-to-value products that new borrowers cannot secure.

Those intending to take out a mortgage for the first time after they have completed their protected trust deed may now face additional challenges. We recently added a guide to getting mortgages after trust deeds to our site. This highlighted the issues of deposit size, credit history and affordability.

The new FSA rules will require additional caution and checks by lenders that the mortgages they provide are affordable for the borrower. This is likely to put downward pressure on the amount that lenders will offer a borrower, and especially so where that potential borrower has taken on new financial commitments after their trust deed has finished (for example hire purchase for a car).

Interest-only mortgages are highly unlikely to be available to new mortgage borrowers in the future. This means that the affordability of a mortgage will be assessed on a full repayment basis. The lender must also take into account the potential cost to the borrower if interest rates were to increase. Once again this is likely to be a limiting factor on the amount that people are able to borrow.

The more positive news is that the FSA do not believe that these new rules will prevent lenders from offering mortgages to first-time-buyers with smaller deposits. Following the completion of a trust deed in Scotland those seeking to get a mortgage will quickly need to commence saving as much as possible to use as a mortgage deposit (and also for the home-purchasing costs that they expect to incur).

The new FSA rules for mortgages seem to offer some protection and hope to those in trust deeds that are already on the housing ladder. Anyone that is seeking to buy a property after their trust deed has concluded will perhaps now need to be even more cautious about restricting the number of new financial commitments that they take on. This will help them to meet the tougher affordability rules that appear likely to be applied.